So, Is Zynga Finally A 'Buy' At $3?


Well, Zynga had an absolute train wreck of a day yesterday, reporting another lousy quarter and cutting its outlook for the year.And now the stock is trading at $3.

For context, this is a company that went public at $10 a share last fall and sold additional stock at $12 a share four months ago.

Those insiders who cashed out in March have saved themselves a plunge of 75% in four months.


In any event, now that the true state of Zynga’s business has been revealed, no one wants anything to do with it. Once-bullish analysts are frantically downgrading, and investors are feeling sick to their stomachs and shoveling every share out the door.

And that, finally, makes Zynga a stock worth looking at.

At $3, Zynga has a market capitalisation of about $2.2 billion.

The company has about $1.6 billion in cash.

The company is burning cash, but not much, and it’s only burning it because it just bought a presumably fabulous $235 million headquarters building in Silicon Valley.

(Don’t laugh. Unlike, say, virtual goods, that building is likely to hold or even increase its value over time. In other words, it’s actually an asset. Assuming Zynga didn’t pay too much for it…)

If Zynga’s business prospects continue to shrink, it will probably be forced to start firing people, which should allow it to continue to operate at cash-flow breakeven or better.

Yes, Zynga will also probably take a huge restructuring charge that will eat a few hundred million of its cash pile. And it will probably make some Hail Mary acquisitions that will eat some more cash.

But let’s assume that, post-restructuring and acquisitions, the company will still be able to hang onto at least $1 billion of cash for a while.

So, with ~$1 billion in pro-forma (post future restructuring) cash and a $2.2 billion market cap, Zynga’s business is valued at about $1.2 billion.

That business currently generates a run-rate of $1.2 billion of revenue per year, which means it’s implicitly valued at about 1X revenue. (Less, if you think Zynga can hang on to more of that cash).

That’s not a bad valuation.

At that valuation, Zynga’s revenue could never grow again and still be reasonably valued.

And, at that valuation, some rich company might well come along and buy Zynga.

To be clear:

Zynga likely has at least 6-12 months of nightmare ahead of it. A lot of the company’s good people will leave, now that the stock has cratered, their options are deeply underwater, and the bloom has long since fallen off the rose. The company will likely need to be restructured, which will be painful and unpleasant. There will probably be mass layoffs and more disappointments. And revenue may well shrink further.

But thanks to that cash pile, Zynga investors do now have some downside protection. And unless management is reckless, the company will probably be able to manage its costs such that it can keep generating (or, at least, not burning) cash. And the business is probably worth something.

So, all in, at $3, Zynga actually looks like a decent value play.

(Of course, it will look like an even better value play at $2. And, at this rate, it may well get there.)


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